Engineering, Economics & Coffee

DoD Contractor Pay Cut

The 2012 Defense Authorization Bill passed the Senate no problemo. I won’t get into the details but there’s an interesting amendment that got attached (funding defense is so become everyone’s sacred cow is my only guess for why this thing could squeeze through).

Apparently congress is going to restrict contractors’ executive pay to $400,000 or less: a number pegged at what the Commander in Chief earns. However, the confusing bit for me was reading about what is now the status quo:

Currently, a contractor can charge the government up to $693,951 for the salaries of its top five executives, based on an executive compensation formula. That cap does not apply to other contract employees, who can earn more.

So I get the general idea. Rather than just focusing on executives we’re capping everyone’s pay. But what exactly does “charge the government” mean? My knowledge of defense contracting is that you bid on a contract, either for a fixed fee or for an adjustable price contract. Even if it’s not a fixed fee, you’re generally charging the government certain “rates” for certain kinds of employees. People like your HR department don’t generally “charge” the government directly for their work. That’s built into a company’s overhead, and only direct billable hours performed on the project are directly billed. Does that mean that executives could actually make plenty more than $400k if they wanted to so long as they only billed $400k of their salary to the government? I don’t know.

Now don’t get me wrong. I’m not worried about poor defense contractor employees having to downgrade from their estates to their mansions or anything ridiculous. $400k is plenty to live on pretty much anywhere in the country. And if they want to go make more money, they can always try their luck elsewhere (of course the argument from DoD contractors is that all their “top talent” will leave, I say let ’em try!)

But it does seem sort of arbitrary to me. Banks benefited heavily both directly and indirectly from not only the TARP money but also from incredibly low interest rates from the Feds. They continue to be able to borrow from the Feds for 0 or near 0 interest rates: something that consumers, small businesses, and non-banking big businesses don’t get to do. Then they lend back to the government and consumers, make crazy profits, and have no restrictions whatsoever on executive pay or bonuses. I guess if you are performing a service for the government they get to set pay rules. But if you are just cheating the government and the American people then you get to do what you want.

I suppose my problem is that if the government sets a price for a certain task and a DoD contractor meets that price it shouldn’t really matter whether they’re wasting a big chunk of change on it on a few pricey executives. That just allows smaller companies who don’t pay big salaries to a bunch of deadwood employees to compete as a leaner machine with lower bids and better efficiency.

Then again, I suppose we are already too far down the line of restricting pay what with freezing Federal employee pay, drastic cuts to state employees and K-12 teachers’ salaries, and reduction of bargaining rights for unions and public employees everywhere. I know war making is not a popular industry, but at least defense contractors are one of the few industries that still make stuff here in America. First they came for the teachers and I said nothing. Then they came for…the defense contractors?